Bad Laws, Bad Results

By Alan Dowd – ASCF Senior Fellow

April 2015 – Much of Latin America, especially the belt of countries stretching from the northern edge of South America into the Caribbean and around the Central American isthmus, is mired in deep poverty. According to the World Bank, 16.4 percent of the people in Mexico and Central America live in extreme poverty, a higher percentage than their neighbors to the north and south, and 80 million people live in extreme poverty in the Latin America/Caribbean region (LAC). In fact, virtually all of the per-capita GDPs of this region fall in the bottom half of the global rankings. The plight of this region is puzzling given that other parts of the Americas, as well as most of Eastern Europe, South Asia and East Asia have shaken loose from chronic poverty and surged past this belt of impoverished states in recent decades. Why is that?

During his trek across the United States in the 1830s, Alexis de Tocqueville observed that “social condition is commonly the result of circumstances, sometimes of laws, oftener still of these two causes united.” What is true of individuals is true of nations. Laws—and public policy in general—shape the circumstances of nation-states. The result can be economic successes or economic messes. The hard but undeniable truth is that bad laws and growth-stifling economic policies have sentenced this belt of states to chronic poverty.

Let’s look at how these countries rank in three key areas of public policy: rule of law, property rights and economic freedom.

The rule of law means just what it says: The law is what rules—not charismatic strongmen, not armies, not anarchy, not the law of the jungle or the law of brute force. The rule of law holds that everyone in a nation-state is subject to the same laws; that laws are written, well-defined and not arbitrary; that the enactment and enforcement of laws is open, fair and transparent.

By comparison, regional neighbors like Uruguay (20th) and Chile (21st) are healthy rule-of-law nations, as are countries that were less politically and economically developed after World War II like South Korea (14th) and Botswana (25th), as are countries that once struggled with living up to the rule of law like Jordan (38th) and the UAE (27th).

The great 20th-century economist Friedrich Hayek called private property “the most important guarantee of freedom,” and he was right.

The International Property Rights Index ranks 97 countries. Again, Venezuela is dead last—97th out of 97. Honduras is 78th. Ortega’s Nicaragua ranks 75th, Guatemala 66th, the Dominican Republic 64th. Ecuador and Colombia are tied at 59th. Again, Haiti is so dysfunctional it’s not even measured.

Finally, we come to economic freedom, which the Heritage Foundation defines as the “right of every human to control his or her own labor and property…In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.”

The World Bank reports that the share of tax revenue as a percentage of GDP in the LAC region is only about 20 percent, compared to more than 30 percent among OECD countries. The low tax-collection levels of LAC countries are an indication not of small and efficient government, but of weak and ineffective government.

In OECD countries, 90 percent of adults have a bank account. “But in almost all the LAC countries,” according to the World Bank, “less than 40 percent of adults have accounts at formal financial institutions.” This is an indication of distrust in institutions—and a weak rule of law.

The result of bad economic policies and poor governance is, not surprisingly, bad economics and poor populations.

Compare oil-rich Venezuela and comparably-sized Taiwan, which has virtually no natural resources. Thanks to a free-market economic system and a pluralist political system, Taiwan’s per-capita GDP is 28th in the world. Venezuela’s in 99th.

Nicaragua’s per-capita GDP is 166th in the world. Comparably-sized Denmark’s is 32nd.

Haiti’s per-capita GDP is 209th, the Dominican Republic’s 123rd. Yet the Bahamas, enjoying the same climate advantages and facing the same resource and accessibility disadvantages, has a per capita GDP of 43rd. It also happens to be one of the more economically free places on earth. This is not a coincidence.

Strings
The LAC region is desperate for investment and development. But regrettably, it is looking for help in all the wrong places, seemingly trying to find a shortcut to development by accepting Beijing’s billions rather than doing the hard work of political-economic reform and building the institutions that can promote sustained economic growth.

To be sure, there are pluses and minuses to Beijing’s increased interest in the Americas. Investment can spur development. That’s a plus. But China’s riches come with strings, and that’s what raises concerns.

Driven by a thirst for oil and other resources, China is aggressively building its economic portfolio in the Western Hemisphere.

Ecuador just received $5.3 billion in financing from Beijing’s bankers, and Beijing announced in January that Venezuela will receive $20 billion in Chinese investment. As World Politics Review reports, “Chinese banks have pledged more than $50 billion in financing for Venezuela and nearly $10 billion to Ecuador since 2005.”

China has poured $1.24 billion into Costa Rica to upgrade its main oil refinery; invested $10 billion to modernize Argentina’s rail system and $3.1 billion to purchase Argentina’s petroleum company; and is planning to build a dry canal to link Colombia’s Pacific and Atlantic coasts by rail, with dedicated ports at the Pacific terminus for shipping Colombian coal to China.

China also is laying the groundwork for the “Grand Canal of Nicaragua.” According to The Washington Post, the Nicaragua canal project will “dwarf the Panama Canal in terms of capacity and bring untold economic benefits to what remains one of the poorest countries in the Americas.” If completed, 5 percent of the world’s sea commerce will move through Nicaragua’s canal.

We know from our own history that trade and economic ties often lead to security and defense ties. And that’s exactly what’s happening as China lays down roots in the Americas:
A report in a journal of the U.S. Army concludes that China is “winning a foothold” in the Americas, with Chinese small-arms, artillery, air defenses and ground-attack aircraft flowing into Bolivia, Ecuador and Venezuela.
Chinese-made transport aircraft and armored vehicles have been used by Venezuelan troops to smash anti-authoritarian protests.
A Joint Forces Quarterly study adds that China has “an important and growing presence in the region’s military institutions.” Most Latin American nations “send officers to professional military education courses in the PRC.”
Most worrisome of all, a Chinese special-forces unit deployed to Latin America in March. “Despite releasing photos of the exercise, the Chinese Ministry of Defense has not identified the Latin American host country,” Popular Science reports. The most likely hosts are Argentina and/or Venezuela.
Moves
To borrow a phrase from an old but timeless pillar of American foreign policy, Beijing’s actions constitute “an unfriendly disposition toward the United States.” And they must be answered.

Those words are President James Monroe’s. He delivered them in 1823, with the aim of putting Europe on notice that the United States would view intervention in this hemisphere as a hostile act. He arrived at that conclusion not because America opposed all things European, but because America opposed the “political system” of European powers—a system which was then “essentially different…from that of America.” Thus, he concluded, “It is impossible that the allied powers should extend their political system to any portion of either continent without endangering our peace and happiness.”

It is the authoritarian political system of today’s China that should concern Washington. That’s why Washington should not countenance Chinese encroachment on the Americas—and why the Monroe Doctrine remains relevant. Yet Secretary of State John Kerry says, “The era of the Monroe Doctrine is over.”

Without question, the Monroe Doctrine was misused at times by some of Monroe’s successors. But by and large, it helped American presidents defend U.S. interests and shield the Americas from threat.

The origin of the threats may change—Czarist Russia and the Spanish Empire in the 1800s, Imperial Germany in the early 1900s, Nazi Germany during World War II, the Soviet Union during the Cold War—but the principles of the Monroe Doctrine remain an important guide for, and statement of, U.S. foreign policy. Instead of scrapping the Monroe Doctrine, President Barack Obama or his successor would be better served developing “Monroe Doctrine 2.0.”

Above all, a revamped Monroe Doctrine should make it clear to Beijing that while the United States welcomes efforts to conduct trade in the Americas, the American people look unfavorably upon the sale of Chinese arms in this hemisphere, the deployment of Chinese military personnel in this hemisphere, and any attempt to export Beijing’s brand of business-suit autocracy into this hemisphere. To borrow the genteel language of the original Monroe Doctrine, these can only be seen as “unfriendly” actions “endangering our peace and happiness.”

Likewise, Washington needs to send the right message to our southern neighbors. Specifically, Washington should emphasize that just as they are not U.S. or European colonies, they should not allow themselves to become Chinese colonies. They should reject—for their sake, for their security, for their sovereignty—arrangements with Beijing that will inevitably erode their independence.

U.S. actions should amplify U.S. pronouncements. For example, Washington should make hemispheric trade a priority, instead of allowing trade deals to languish. Colombia and Panama waited five years for Washington to approve trade agreements.

Washington should revive aid and investment in the Americas. That presupposes a stronger U.S. economy. And Washington should encourage good governance and liberal economics in Central and South America by rewarding governments that believe in free markets and the rule of law. That presupposes a commitment to both by U.S. policymakers.

Washington should be proactive on hemispheric security, building on successful partnership-oriented models in Colombia and Mexico. That presupposes U.S. military capacity, which means sequestration’s disastrous defense cuts must be reversed.

And Washington needs to answer Beijing’s provocative behavior. U.S. assets could be positioned to checkmate China’s anti-access/area-denial strategy in the South China Sea; the trickle of defensive weaponry flowing to Taiwan and the Philippines could become a torrent; the U.S. could put muscle behind ASEAN’s recent declaration in defense of “freedom of navigation in, and over-flight above, the South China Sea” by forming a joint maritime taskforce; the U.S. could start acting like the energy superpower it is. Joint Chiefs Chairman Gen. Martin Dempsey calls on U.S. policymakers to view “energy as an instrument of national power.” Wielding this instrument could have a profound effect on a China.

It’s been said that Beijing sees the world as a chessboard. America has many moves it can make in China’s backyard.